As the term says, vertical exaggeration means to exaggerate (or enlarge) your features vertically - most of the cases to visualize the elevation differences.

For mainly a flat surface or in a small-scale map, vertical exaggeration can help capturing readily (otherwise unnoticeable) elevation changes in the terrain.

In ArcScene, right click on your layer > Layer Properties. Then under ‘Base Heights’ tab, you will see ‘Z Unit Conversion’, where you can choose your desirable factors to better view changes in the vertical direction.